Key Concepts and Summary

Key Concepts and Summary

Money is what people in a society regularly use when purchasing or selling goods and services. If money were not available, people would need to barter with each other, meaning that each person would need to identify others with whom they have a double coincidence of wants—that is, each party has a specific good or service that the other desires. Money serves several functions: a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. There are two types of money: commodity money, which is an item used as money, but which also has value from its use as something other than money; and fiat money, which has no intrinsic value, but is declared by a government to be the legal tender of a country.

Glossary

barter

literally, trading one good or service for another, without using money

commodity money

an item that is used as money, but which also has value from its use as something other than money

commodity-backed currencies

are dollar bills or other currencies with values backed up by gold or another commodity

double coincidence of wants

a situation in which two people each want some good or service that the other person can provide

fiat money

has no intrinsic value, but is declared by a government to be the legal tender of a country

medium of exchange

whatever is widely accepted as a method of payment

money

whatever serves society in four functions: as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment.

standard of deferred payment

money must also be acceptable to make purchases today that will be paid in the future

store of value

something that serves as a way of preserving economic value that can be spent or consumed in the future

unit of account

the common way in which market values are measured in an economy